Fund-grading forensics

For proponents of passive investing, the SPIVA U.S. Scorecard is a bit like Exhibit A. It regularly shows how active funds keep lagging their benchmarks, reporting for example that 79% of all active large-cap U.S. equity funds underperformed the S&P 500 in 2025. This was the fourth-worst year for that category over the 25-year Scorecard history.

No wonder fund investors keep crowding into passive funds.

These figures may be exaggerated, however. A recent article by researchers K.J. Martijn Cremers, Jon Fulkerson and Timothy Riley makes the point already in its title: “How the SPIVA U.S. Scorecard Understates the Performance of Actively Managed Mutual Funds”.

While the Scorecard is presented as an “apples-to-apples comparison”, the researchers state that the Scorecard “makes several choices that systematically understate the performance of active funds.”

The first involves the treatment of funds that are closed or merged into another fund during the chosen period. The Scorecard counts all of these funds as underperformers, regardless of their actual performance until they are closed.

The second involves weighting; the Scorecard weights all active funds equally, whereas the researchers weight performance by fund assets. To be fair, the Scorecard also presents asset-weighted performance, though not the corresponding underperformance shares.

Their third adjustment involves switching from hypothetical benchmarks to actual passive funds.

In essence, they set out to find the percentage of money invested in active funds that underperforms equivalent passive funds. That may seem close to the SPIVA goal of counting the number of funds underperforming their benchmarks, but in practice it makes a whole lot of difference.

Here’s a telling example: According to the SPIVA Scorecard, 81% of large-cap core funds underperform over the 3-year period of 2022 through 2024. All of the researchers’ adjustments then reduce the measured underperformance, and the combined effect is powerful: ”Making all three changes simultaneously decreases the percentage to 46%. That is, the results invert, from a supermajority of active funds underperforming to a small majority of assets outperforming.”

And they report even more striking results from recalculating fixed income performance. ”Among high yield funds, one of the largest fixed income categories, the 15-year horizon underperformance rate decreases from 74% to 12% after our changes. Thus, within the fixed income class, our changes fully reverse the Scorecard’s conclusion: the data support the finding that active fixed income funds tend to outperform.”

The article then lists a few other choices that might be made, like using instead the share class with the lowest expense ratio or adjusting for systematic risk, both of which would reduce the underperformance percentages, but not by much. Either way, it’s a demonstration of the care needed to evaluate seemingly indisputable statistics. And many active managers are likely to feel some sort of vindication from this conclusion:

“Broadly speaking, the SPIVA U.S. Scorecard is too negative on the value of active management. Staying with the Scorecard’s framework, we identify substantially more value after better aligning the analysis with the actual investor experience.”

You might object that I’m biased, working as I do for an active fund manager. Of course I am! And the researchers are likely to meet the same criticism, as this research was sponsored by the Investment Adviser Association’s Active Managers Council. As they say about the social sciences: Where you stand depends on where you sit.

I would like to add, though, that a similar caveat might be raised about the Scorecard itself. After all, it is produced by S&P Global, which profits massively from the switch from active to passive funds. That point is not raised in this paper, though.

“How the SPIVA U.S. Scorecard Understates the Performance of Actively Managed Mutual Funds”

K.J. Martijn Cremers, Jon Fulkerson, Timothy Riley